Wells Fargo Converting Option Arms into Interest Only Loans

Wells Fargo is reportedly converting its $100 billion+ stable of option arms into interest-only mortgages to avoid a complete disaster, according to a piece in the WSJ.

Borrowers with option arms are receiving loans with interest-only periods of six to 10 years in the hopes that home prices turn around during that period.

The company has also written down Pick-A-Pay balances on 43,500 loans by a collective $2 billion, or $46,000 per modified loan.

Wells believes such a strategy eliminates the near term risk of borrower default, which could be true, but there’s no guarantee these deeply underwater borrowers will be back in the black once the IO period ends.